By Jim O’Neill, Chairman, Goldman Sachs Asset Management.
I spent three days in Africa this week, or to be precise, Cape Town and briefly {{{*}}} Johannesburg in South Africa, as well as Lagos and Abuja in Nigeria. I attach the charts from my presentation about Africa’s potential, its challenges, and its current and future position in the world. As I told people at all the events, if Africa could behave more together economically, then by 2050, BRICs would become BRICA from an economic perspective. For South Africa, to justify BRICs becoming BRICS, it needs to help deliver the potential for the continent. Whether it happens or not will actually depend more on Nigeria – approximately 15% of the continent’s population. More on all of this below, but I have to start this week with the Thatcher legacy and the UK.
The UK and Maggie.
While the world, generally speaking, if not all, prepares to pay homage to her profound influence, the mood in the UK has brought back memories of how she divided the country in the late 1970s and 1980s during the bulk of her reign. I was just starting my PhD around the time she became Prime Minister, and she was not a popular figure on university campuses, not least as education spending caught some of the brunt of her government’s spending restraint. I often found myself trying to defend her economic strategies despite the harshness and abruptness of some of their immediate consequences. I think I was partially attracted by supporting the underdog, such was the dislike for her from many I mixed with. Looking back today, I wonder whether it was possible for any of us to really appreciate what could have been the outcome, even if we did actually know what we were talking about. The positives and negatives have been highlighted in the extensive British media coverage but I’d like to add two more aspects that are close to my heart.
Firstly, the Thatcher policies to open up the City of London and remove FX controls led to many things, including the beginnings of the end of the class-dominated system of the City employment and opportunity. If it hadn’t been for this, I would never have been afforded the opportunities I’ve had. Secondly, as represented wonderfully in the UK Independent on Thursday, the current state of British football and many of the upside and downside aspects of the – at least domestic – legacy of Thatcher. In this respect, I’m with those that love our capitalism, but believe it needs to be more adoptive and responsible.
On the broader economic legacy, I think Martin Wolf’s piece in the FT on Friday did a pretty decent job presenting the actual facts instead of the emotions.
The US Fiscal House in Order?
As I returned from my intense Africa trip, I thought at first it must have been jetlag that caused me to misread GS’s Jan Hatzius’s Wednesday US Daily Comment. After the third reading, it was still entering my brain the same. It is a piece many European – and especially British – policymakers should read, as it argues that the US fiscal deficit is significantly on the mend, currently running at less than 5% of GDP. What a contrast to the ongoing evidence of growth-starved Europe, and surely quite powerful evidence in the debate about the appropriate speed of fiscal policy tightening.
Following the previous week’s significant data disappointments, it was a relief that weekly US job claims fell back sharply on Thursday and the debate about how much the US has slowed again continues. Mind you (and this may partly be what US markets have smelt), given the better fiscal developments, perhaps we can now be more at ease regarding the fears about the cyclical consequences of further tightening. As often, it is quite easy to see 2013 to 2015 as a relatively rosy story for the housing market recovery, energy competitive induced US.
China. Many Questions – Again.
This past week, Fitch acted on what many have talked about for some time, citing concerns about aspects of credit growth, by downgrading China. On cue, the latest monthly credit and monetary data showed a stronger-than-expected acceleration, and I suspect many that are deep in analysis of China’s actual and shadow banking systems are going to remain worried for some time. While I can see the confined aspects of such concerns, I don’t share the broader macro concerns as China is an economy that has very large national savings and needs to save less and – while better channelled – borrow more.
Roderick MacFarquhar, a professor of history and political science at Harvard, had an interesting piece in Friday’s FT in which he presented the case for China’s corruption being the central problem facing the country. He suggests reducing it dramatically might mean the end of the single party. Keeping it could mean the end of a strong economy. Funnily enough, some of my most interesting discussions about corruption took place in Nigeria, and I would suggest that the general debate about corruption is far too simplistic. Of course, corruption, in principle, is a bad thing in itself, but is there any society, in some form, completely free from it? One of the most senior people in Nigeria argued, if there were clear broader negatives for an economy that are observable, then yes, the scale of corruption would and should be targeted. But if it actually didn’t impair, then one would have to be rather careful what one might wish for.
In this regard, I am especially looking forward to the release of March retail sales, due imminently. February’s were a major negative surprise and appeared to possibly reflect the success of the government clampdown on luxury gifting during the Chinese New Year celebrations. If there is no broader rebound in March, this will be disappointing for the cycle. Ahead of the release, the official auto sales data is quite encouraging, with high vehicle sales for the overall first quarter being reported, up by 17% to 4.42 million units, a better-than-expected sign of the wealth of the broader consumer.
Along with the much lower-than-expected CPI of 2.1% and a modest trade deficit (with stronger imports), contrary to what I read from most and in contrast to February, it looks like March has been a better month for the Chinese economy.
Other Bits and Pieces.
Before I return to the Africa theme, a couple of other things that caught my attention this week:
1. Russia joined the rest of the BRIC crowd by lowering 2013 GDP forecasts, reducing it sharply from 3.6% to 2.4% this week.
2. North Korea continues to be front and centre. I can’t see how North Korea can escape from this sabre rattling on the same course, and I continue to believe that this is the beginning of the end.
3. The Australian Dollar is getting more and more on my radar as something that is ‘actionable’ for investors. The rise back above 1.05 against the US Dollar appears to have no relation to the economic cycle nor commodity prices and now seems to be some kind of by-product of the European mess and, of course, Japanese liquidity. It should be closer to 0.85 than above 1.05, and I can’t think that the Reserve Bank of Australia (RBA) can be too far off taking bigger steps to try and deal with it.
Africa. So Exciting.
‘Esteemed Guests. Money laundering activities are prohibited in this hotel. Thank you for your understanding’. This was the sign behind the front desk of a top Lagos hotel. A picture of a rifle with a cross marked across it hangs clearly visible in the lobby of the central bank in Abuja. It is not difficult to see all the things that might worry you about business in Nigeria and raise all those well-known fears about the continent in general. Judging by the large numbers present at the African Venture Capital Association (AVCA) conference in Cape Town where I was the guest speaker, I hope some more get worried, as smart investors don’t want all the clear opportunities to be too evenly shared.
The bull principle is pretty straightforward. As African states cease to fight within themselves and against each other, governance improves, corruption declines, and technology and other forms of infrastructure are enhanced as citizens urbanise and their lives and needs accelerate on the upside. In agriculture, the same technology and other infrastructure improvements lead to dramatic increases in productivity.
Nigeria lies at the centre of this bull case. Approximately 15% of the continent’s population (a population that could match the US by 2050) and a huge desire for a better standing of life – it is very exciting. In the short time I spent in both cities, I met with the country’s top policymakers and business people, and it is impossible not to get caught up in the enthusiasm. I think the future looks promising.
The bear case is primarily that delivering this potential is just too hard. The extremely low Growth Environmental Scores (GES) produced by GS Global ECS Research show the reality of today versus the hope and excitement of the future. Dramatically improving education, significantly extending the use of all technologies (not just mobile phones) and, of course, improving the rule of law, stability of government and reducing the scale of corruption – these are requirements for the potential to be realised.
For those of you that have travelled to Indian cities, travelling around Lagos and Abuja is not such a dramatic experience, although you would need better security. In fact, I was surprised, given how much I continue to hear and read, how we managed to do as much as we did in one working day in both cities. I can think of a number of other countries in the BRIC and N-11 world where it would not be possible. I continue to have a lot of passion for the ‘N’ in the Next 11.
South Africa. BRICs vs BRICS.
My main point of my busy time in Cape Town is that, to some extent, this is now a pointless debate. The BRICS leaders have now come up with such a specific policy idea between them, namely the BRICS Bank, that it is pointless to still debate either the merits of South Africa’s inclusion or, indeed, the purpose of the BRICS club. It is now up to South Africa, the other BRIC countries, and all of their advisors, to turn this BRICS Bank into something credible and functional. South Africa, given its more advanced financial markets and rule of law, should really think about using this to help build cross-border capital and trade flows to play their own part in allowing the continent to be more economically attached, and therefore successful. By and large, what South Africa needs to do policy-wise, as for much of the rest of the continent, is well-known. They need to do the hard part
and deliver it. As I said to many I spoke to, and have done elsewhere before, the best way to think about it is to look at South Korea and their very high GES and high levels of wealth, and to think what you can adapt and copy for yourself.
Ethiopia – the One that Escaped the N-11.
Ethiopia was mentioned in a couple of conversations I had with people, and is a country that was also highlighted to me at a recent international gathering in Italy. It is, of course, a very small economy, probably not much more than $50bn, which is why we didn’t include it in our N-11 group back in 2005. But the country has grown by 10% over the last decade and it sounds as though the potential remains exciting. So, next time a policymaker from anywhere in Asia, Europe or Latin America comes to see me and asks why their 20-45 million populated country isn’t included in the N-11 when “it is growing so much”, my answer is: Ethiopia has 80 million people, is growing by 10% and they are not. Perhaps Ethiopia can become the Ole Gunnar Solskjær (substitute) of the N-11?
Japan Beckons.
So, as my whirlwind tour continues with now less than three weeks to go, later next week I will be in Tokyo. Judging by what I am hearing about the kind of characters that might appear in town for my last Goldman Sachs visit, I hope I manage to remember something!
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